Association for Public Policy Analysis & Management

About one-third of the approximately $30 billion spent annually by U.S. taxpayers on biomedical research is used for indirect cost payments to universities and other grant recipients. These overhead costs are meant to help support infrastructure, utilities, and administration. Institutional indirect cost recovery rates are determined through notoriously complex negotiations between grantees and funding agencies and have been the source of significant controversy in science policy for decades. One view is that these rates are too high. This view came into focus during the so-called Stanford scandal in the 1990s, when some private universities were accused of enlarging their indirect cost recovery rates through improper accounting procedures. There are long-standing complaints by scientists that higher indirect cost rates mean less funding for actual research, and that indirect cost policy creates incentives for universities to over-invest in research capacity, including new building, and hiring of soft money faculty. On the other hand, universities have long argued that indirect cost rates under-compensate universities, and that in effect universities lose money on many grants. Getting the rate and incentives right is important and will help ensure that limited biomedical research funds are used most efficiently and effectively towards advancing knowledge and health. This paper leverages newly available data on institutional indirect cost rates and information on grant rewards and funding to examine factors affecting indirect cost rates, and the effects of indirect cost rates on university behaviors and the returns to federal R&D spending.